When The Next Real Estate Downturn Starts

"There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know." ― John Kenneth Galbraith

Spoiler Alert: No one knows when or how deep the next downturn is. If you think you know, see part B of the Galbraith quote above (If you do actually know we should talk). But seriously predicting the events created when multiple complex systems of complex systems compete is not within our capability. There are observable trends though.

Are we closer to the next downturn than last week, last month or a year or ago? Yes but that's just a function of the unidirectionality of time and the cyclical nature of real estate. What if the downturn is five or ten years from now and you're sitting in cash the whole time waiting for that perfect moment to start buying?

Recency bias has caused a lot of people to constantly see the next 2008 as just around the corner (including more than a few prospective consulting clients) but the reality is that it will take a 2007 sized event to deliver the 2009 opportunity and the last one of those was about 80 years ago (1929).

Now you could say on the commercial side where I focus the previous big buying opportunity came in 1989 with the formation of the RTC (which took the collapse of the S&L industry to create) so that's a period of 20 years between opportunities.

Fred Foldvary says 18 year cycles repeat throughout our history and in 1997 predicted 2008 and has conveniently predicted the next one but remember part B above.

So the next downturn could come in 2088 (2008+80), 2028 (2008+20) or 2026 (2008+18) or ???? but even if Fred is right twice and it comes in 2026 that's a long time to wait for cheap prices while missing nine years of cash flow, amortization and depreciation.

The important thing to keep in mind is that people have been making money in real estate since real estate existed and not just when the 'perfect moment' came along. Nearly every experienced real estate investor I've met has a 'never sell' story where early in their career they took what they thought was a good profit on a property only to look back on it and say "I never should have sold it". That's because sometimes real estate works over short periods but it always works over the long term.

If we could hop in Giovanni's time machine and go back 20 years, what would you buy? Everything, right? Even knowing that 2008 was going to happen, right? Unfortunately the machine is in the shop waiting for a part (to be delivered from the future) so the second best moment to buy is today.

The advantage of real estate is that you make your money when you buy so if you acquire a property today that cash flows with a margin of safety in a market with good job prospects by the next downturn you'll be able to ride it out comfortably.